Qualified Escrow Account

The safe harbor turns on two requirements and one ongoing condition.

Reg. section 1.1031(k)-1(g)(3)(ii) requires an escrow holder that is not you or a disqualified person, and an escrow agreement that expressly limits your rights to the cash as provided in paragraph (g)(6). Those limits mean no right to the money before the end of the exchange period, except after day 45 if nothing was identified, after you receive all identified property, or after a written, material contingency beyond your control.

Paragraph (g)(3)(iv) says the safe harbor ends when you gain an immediate ability or unrestricted right to the cash. Your state-law right to fire the escrow holder is disregarded. Paragraph (g)(3)(v) adds that you may receive money directly from a party to the exchange, but not from the escrow, without losing the safe harbor.

Example 3 of Reg. section 1.1031(k)-1(g)(8) adds a detail that trips up drafters: an escrow agreement that limits only the intermediary's rights, and not yours, is not a qualified escrow account.

In the regulation's own example, an escrow holds the buyer's cash until the replacement is bought.

Example 1 of paragraph (g)(8): B sells property X to C for $100,000. C pays B $10,000 and deposits $90,000 in escrow as security for C's promise to buy the replacement. B cannot reach the escrow before the exchange period ends, except if nothing is identified by day 45 or after B receives the replacement. The $90,000 is used to buy the replacement, so B is not in receipt of it and the exchange qualifies; the $10,000 is boot.

Example 2 shows the failure mode. The escrow let B demand the cash if a rezoning did not happen by a set date. When the date passed, B had an unrestricted right to the $100,000 and was in constructive receipt, so the transaction became a sale even though B never asked for the money.

It differs from a qualified intermediary's account in what it does, not in where the cash sits.

A qualified escrow secures someone else's obligation to deliver replacement property. A qualified intermediary under paragraph (g)(4) steps into the exchange itself, acquiring and transferring the properties under a written exchange agreement. The regulation lets you use more than one safe harbor in the same exchange, but each must be met separately.

In Example 3 the intermediary arranges the sale and the buyer's cash goes into a qualified escrow, so both safe harbors protect the funds. Whatever the structure, ask how your proceeds are held; see what happens if an intermediary fails. The trust version of this safe harbor is the qualified trust, and the receipt rule it guards against is actual receipt.